30 August 2005

If you are feeling rich and altruistic, you might think about issuing your own Social Policy Bonds. Say you wish to see crime fall in your part of your city. You don't think more policing is either forthcoming or the answer, but you still don't know what the answer is. Rather than accept the situation or moving away, you could issue Crime Reduction Bonds for your area. These bonds would be redeemable for a fixed sum once crime, however you decide to measure it, falls below a threshold for a sustained period.

Essentially, you would be contracting out the achievement of crime reduction to the market. Holders of your bonds would have incentives to look for the most efficient ways of reducing crime. Criminals themselves could buy your bonds and make a profit by seeking alternative forms of distraction. Non-criminals might buy your bonds and do things that are beyond the imagination or experience of police forces: subsidise taxis for young men emerging from pubs; offer adult literacy classes; subsidise marginal types to move away; subsidise employment for youths etc.

You might have other objectives. You could, for example, issues Social Policy Bonds that target pollution in your city, or te water quality of a local river or lake. Or you might want to see better health or education standards in a developing country. As a first step, you could download a handbook (pdf file) I prepared, using the example of literacy amongst schoolchildren in Pakistan. Feel free to get in touch directly with me (via the Comments, below, or through email link given in my Profile), if you would like to take it further.

27 August 2005

The desire to overcome politics is based on the assumption that, if not subject to structures imposed from on high, free human action - whether in international affairs or domestic politics - is unstable and dangerous. People who think in this way cannot conceive of their being an order which they have not consciously designed: they cannot imagine that people and states themselves might be able to devleop rules, perhaps unspoken ones, to foster peaceful free commerce. John Laughland, 'The tainted source', p162

Laughland argues persuasively in favour of the constitutional foundations of the liberal order and against post-national structures, such as the European Union, which he sees as corrosive of liberal values.

What does this mean for an advocate of Social Policy Bonds? Essentially that policymakers have a tendency to be overly prescriptive. Suspecting, probably correctly, that a market free-for-all would bring about unacceptable levels of poverty and a collapse in the social order, they finance programmes and institutions ostensibly aimed at avoiding these disasters. They legislate well-meaning (at least at first) measures, such as trade restrictions, which have such unarguable objectives as the maintenance of decent standards of living for their (alleged) beneficiaries. Within a generation or so, these measures become corrupted, fossilised and counterproductive. Vested interests take advantage of them and ensure their persistence, while the intended beneficiaries gain nothing. If this sounds far-fetched simply look at agricultural subsidies in the rich world, or subsidies to other sectors, such as energy and transport. Under a Social Policy Bond regime, on the other hand, government would not prescribe how its social and environmental objectives are to be met. It would simply reward people for achieving them, however they did so.

Another quote from the same book:

[M]any countries of the European Union ... often have a corporatist understanding of the state. There, the activities of government are identified almost entirely with spending money. Federal states are particularly prone to this understanding of statehood, because the bulk of their doemstic politics is devoted to wrangling between the various layers of government over funds. Ibid, p 194

24 August 2005

Here in Thailand there is a grim insurgency by Islamic fascists in the deep south of the country. As one response, the Thai Government has put up tv screens in coffee shops and bars in an effort to distract potential militants. I myself believe that the role of tv, movies, and pornography in weaning people (men, I mean) away from militarism has been underestimated, so I do approve of this government inititiave. Unfortunately, simply the fact that it has been undertaken by government could be its downfall. Partly because anything the government does is bound to be deliberately misinterpreted to the impressionable, partly because in putting up these public tv screens the government has exposed itself to ridicule if the insurgency continues.

The private sector is much freer to experiment with initiatives of this sort. If Social Policy Bonds targeting the insurgency were issued, bondholders could go further than government, for instance by screening raunchy DVDs. They would not be deterred by fear of ridicule if they failed and, most important, they would have incentives to terminate failed initiatives as soon as their failure becomes apparent, and concentrate on finding successes. I cannot see this Thai Government, nor any other, being so ready to admit that their ideas are ineffectual and to explore and implement new ones.

22 August 2005

The Social Policy Bond mechanism encourages diverse responses to social and environmental issues. It does this via market forces. Unfortunately, many believe that market forces must inevitably conflict with social goals. This is understandable, since in recent decades an enhanced role for markets has made many people very wealthy indeed, while the less well-off have gained relatively little and many social and environmental problems appear to have worsened.

So it is important to remind ourselves that market forces and self-interest can serve public, as well as private, goals. Often, these private goals coincide with social goals, so that, for instance, the market routinely performs vital tasks such as food distribution and the provision of such indispensables as home medicines, baby needs, furniture and other consumer goods. These are exceedingly complex tasks but, left to the multiplicity of agents operating in reasonably competitive markets, they are accomplished in ways that fulfil not only the private goals of the firms and consumers involved but also society’s goal of efficient supply of goods and services. This feat results from the combination of the self-interest of large numbers of market players, and their ability to react appropriately to ever-changing circumstances.

Some would attribute the triumph of the western market economies over the state-controlled, centrally-planned economies of the Soviet Union and its satellites to the victory of materialist motivations over political ideals. But it is more likely that the efficiencies and incentives of pluralism had won out over central direction; in short, that decentralisation and diversity had triumphed over dirigisme and central planning.

Governments tend to be centralist in their instincts. In practice, this has meant that market forces are rarely allowed to play a significant role in organising the production and distribution of those goods and services that governments supply. Government agencies also operate in a non-competitive environment, which discourages self-evaluation. Since governments in the developed countries now spend on average about 37 per cent of national income, these are significant deficiencies. One result is that public services, such as health, education and housing, seem perpetually to be in crisis. Another is that crime and the fear of crime are soaring. I recently spent several weeks in a compact, English city during the summer, and was surprised at how dead the city centre was after 6pm, even on warm, dry days.

Yet another result of the central planning is that large sums of consumers’ and taxpayers’ money are spent on perverse subsidies to sectors such as agriculture, road transport and energy. Perverse subsidies are those that are economically inefficient, socially divisive and environmentally destructive. They also favour the large and global over the small and local. So, for instance, in the US about 88 per cent of support to the agriculture sector goes to the largest (in terms of gross sales) 25 per cent of the farmers. Perverse subsidies are significant: those for agriculture in the developed countries alone amount to more than $300 billion annually.

Social Policy Bonds would enable governments to continue to set society's goals, and the market to achieve them. Clarity and single-mindedness in achieving social goals are important, and governments can have those qualities. But diverse and adaptive solutions are necessary to achieve these goals, and that is where markets, through Social Policy Bonds, can play their part.

19 August 2005

In my post about Israel Peace Bonds I raise the possibility that one way of solving the Arab-Israeli conflict is intermarriage between the two communities. This seems to be controversial, so I will elaborate.

First, I am not advocating intermarriage. Rather, I am advocating a policy that will encourage anything that will end the conflict peacefully. If intermarriage is likely to do then, I believe, it should be rewarded. Second, note that it is not me, nor any government official, who would sponsor intermarriage: it would be holders of Israel Peace Bonds. They would reward intermarriage only if they think doing so would help solve the conflict. I can't see anything very controversial about this. As human beings, most of us agree that anything that resolves conflict peacefully should be encouraged. Apart from fanatics, most of the devout on both sides of the conflict would also put human survival above ethnic purity or identity politics. There is very little intermarriage between the two communities today. Even a little could go a long way. Bondholders would be unlikely to pursue intermarriage as their sole solution - though if they did, and were successful, who could argue with that? Most likely it would be one of a range of policies aimed at increasing informal contacts between the two sides including, as I suggested, school exchange visits, sports teams and freer trade.

Jan Lundberg, veteran petroleum analyst who joined the environmental movement and fought industry expansion, has a different explanation for record gasoline prices than the one provided by his former firm, Lundberg Survey, which on Aug. 14 attributed them only to high crude oil prices.

"Lundberg ... told Fox News that it is erroneous to calculate that the adjusted price for gasoline, including inflation, is under the price of two and a half decades ago. This is because "subsidies - direct, indirect and hidden, such as the War on Iraq -- to oil and refined products, if included in the price, would make oil cost perhaps $120 per barrel today. This is one reason people must work longer hours and obtain extra jobs," he explained." Source

09 August 2005

This is an unpublished article outlining the application of the Social Policy Bond principle to the Arab-Israeli conflict

Israel Peace Bonds: give greed a chance

Or to put it more politely: ‘give financial self-interest a chance’. Why? Because the idealists and ideologues, the politicians, the generals, and the men of religion have failed tragically to end the violence in the Middle East. Perhaps it’s time now to bypass the usual suspects and contract out the achievement of peace to the private sector.

It’s largely a matter of focus: we don’t have to be as ruthless as the terrorists, but we do have to be as focussed on what is presumably our ultimate goal: peace in the Middle East. We need to go beyond the slogans, beyond history and even beyond the different sides’ views on truth and justice. We need to reward the successful achievement of peace, rather than activities that are supposedly aimed at achieving it—activities that are often counterproductive, unethical or disturbingly violent themselves.

There are too many people with a vested interest in continuing the conflict between Israelis and Palestinians. Many people, all over the world, and certainly most Israelis and Palestinians, would like nothing more than to see an end to the violence in the region. But there are many in positions of power or influence who are half-hearted about peace; others who feel threatened by it, and others who, for whatever reason, actively promote violence.

Ideally, then, we need a way of promoting peace that can modify or circumvent these people’s uncooperative or obstructive behaviour. We need to mobilise the interests of the far greater number of people who want peace. We need to find a way that can co-opt or subsidise those people in positions of authority and power who want to help, and at the same time bypass, distract, or otherwise undermine, those opposed to our goal.

Ideally too, we would use market forces. Markets are the most efficient means yet discovered of allocating society’s scarce resources, but many believe that market forces inevitably conflict with social goals: accentuating extremes of wealth and poverty, for example, or accelerating the degradation of the environment. So it is important to remind ourselves that market forces can serve public, as well as private, goals. Israel Peace Bonds are a new way of channelling the market’s incentives and efficiencies into what must be one of the most sought after objectives by most Israelis, Jews and Palestinians wherever they are: ending the violence between Palestinians and Israelis.

Unlike current funding programmes, which reward activities, organisations or individuals, Israel Peace Bonds would reward only the targeted outcome: peace in Israel. And unlike policies run by governments or inter-governmental organisations, they would encourage diverse, responsive and cost-effective projects.

My suggestion is that interested individuals and organisations collectively back Israel Peace Bonds. They would launch the bonds by making deposits into an escrow account. Then they would issue the bonds, which would be sold by auction, and redeemed for a fixed sum only when the number of Israeli citizenqqqqqs or Jewish visitors killed by terrorism in Israel reached a very low level.

Unlike normal bonds, Israel Peace Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that peace is achieved quickly. Importantly, the bonds would make no assumptions as to how to bring about greater peace—that would be left to bondholders.

Once issued, the bonds will be freely tradeable on the free market. As the level of violence fell, so the bond price would rise. Bondholders would have incentives to cooperate with each other to do what they can to achieve peace, then to sell their bonds at a higher price.

The issuers of the bonds would decide only on the definition of peace to be targeted—not on how to achieve it. That would be left up to investors in the bonds, who have every incentive to maximise the reduction in violence per unit outlay. So, in contrast to the current fossilised, counterproductive approach, an Israel Peace Bond regime would stimulate research into finding ever more cost-effective ways of achieving peace. All initiatives would have a chance: not just those thought up or approved of by a limited number of politicians.

Investors in Israel Peace Bonds would be in a better position than governments to undertake a wider range of peace-building initiatives. They might, for example, finance sports matches between opposing sides, promote anti-war programmes on TV, set up exchange schemes for students of the opposing sides. They might even subsidise intermarriage between members of the opposing communities, or try to influence the financial supporters of conflict outside the region to redirect their funding into more positive ways. They could offer the Palestinians and the citizens of neighbouring Arab countries different forms of aid, including education and scientific aid, and measures aimed at enlightening Arab citizens. All these measures would be a cause of suspicion and mistrust if undertaken by governments. But when done by private sector bodies that either hold Israel Peace Bonds themselves, or are financed by bondholders, the motivation for them would be clear: they would be a commercial undertaking, with no hidden agenda other than to bring about peace, as defined by the bonds’ redemption terms.Bondholders could lobby, or work with, the Israeli and Arab governments to, say, give a higher priority to peace studies in schools, but they could also develop peace-teaching projects of their own. While immediate peace might not result, much more could be done to enhance the prospect of peace in the future. Bondholders could, for instance, make strenuous efforts in Israel and the neighbouring countries to have some mixed classes of Jewish and Palestinian children at kindergarten and school. Both groups could be given the chance of spending time with each other. At the very least, bondholders might think, there should be opportunities for the younger people from both sides of the conflict to meet, discuss, argue and form friendships.

Some powerful people in governments, religious institutions or militant organisations would resent the targeting of such objectives by external agencies in this way. But, while under the current system they can oppose peace in ways that attract support, under a Peace Bond regime, they would have to openly declare their opposition to peace itself. It is precisely this focus on the outcome of peace—rather than activities or institutions—that would help strengthen the coalition working to achieve it.

Too many small bondholders could probably do little to build peace. The bonds would most probably end up in the hands of a few large holders, who would have incentives to co-operate with each other, and to finance those projects that they believed would be most effective in reducing the level of conflict.

By appealing to people’s self-interest, Israel Peace Bonds are likely to be more effective than conventional efforts aimed at reducing violence. In channelling market forces into the achievement of this objective the bonds could bypass or even co-opt the corrupt or malicious people in government or elsewhere who stand in the way of peace.

In today’s emotional climate decision-making is too often reactive. It is too easily swayed by those with a propensity for violence or those who benefit from it, whether financially or emotionally. Governments can evade or deflect censure on grounds of communal affiliation or patriotism, because the adverse effects of their policies are difficult to relate to their cause. Israel Peace Bonds would focus on an identifiable outcome and channel market efficiencies into exploring the ways of achieving it. They could be the most effective means of achieving the peace that the people of the Middle East yearn for and deserve.

05 August 2005

A Social Policy Bond regime would mean focusing entirely on outcomes. Apart from other advantages, this means that the range of indicators of success or failure can be expanded. Currently, a government that wants to reduce cocaine consumption has to rely on pretty dodgy figures to monitor how well its policy is doing. Its indicators will tend to be derived from current institutional structures. Its metrics for cocaine consumption, for instance, currently include seizures by customs, or the numbers of people requiring hospitalisation or dying from their addiction. These have obvious flaws.

A story in today's [London] Times shows how much more versatile in its choice of indicators a Social Policy Bond regime could be. Scientists in Italy can measure the extent of cocaine abuse by measuring the concentration of a metabolic by-product, benzoylecgonine in the Po river basin. "[T]he Po carries the equivalent of about 4kg of the drug a day, with a street value of about £20,000. ... [F]or every 1000 young adults in the catchment area, about 30 must be taking a daily dose of 100 milligrams of cocaine, which greatly exceeds official national figures for cocaine use." ('Where rivers run high on cocaine'.)

Focusing on outcomes makes it easier to target such indicators, which are more strictly correlated with policy targets. Unfortunately, in today's policy environment, policymakers target indicators for reasons unconnected with their usefulness. So Kyoto targets not the stability of the climate, nor even the composition of the atmosphere, nor even emissions of greenhouse gases, but anthropogenic emissions of those gases that were thought to be greenhouse gases in the 1990s. A Climate Stability Bond regime would be different, because it would reward people for achieving what we actually want to achieve: a more stable climate. It could include such indicators as insurance payouts for adverse climatic events, variations in temperature, the sea level at various locations etc. All of these would be more closely related to society's goal than the alleged causes of climate change.

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Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image in the panel below to download a 2400-word article published by the Institute of Economic Affairs, London.

Social Policy Bonds in 2400 words

Social Policy Bonds in the media

25 May 2018: a short article on Social Policy Bonds and their possible application in India, appears on Market Express (India). It is by Dr Ashok V Desai and titled Incentivizing welfare.

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

October 2013: Professor Robert Shiller of Yale University, is named as one of the three winners of the 2013 Nobel Prize in Economics. His Nobel Prize lecture (pdf) delivered on 8 December, mentions Social Policy Bonds. Professor Shiller has for many years encouraged my work on Social Policy Bonds, beginning in late 1996 when he sent me this letter.

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.